Economist predicts natural gas price spikes, market changes

DALLAS�The global natural gas market is about to change more drastically than most observers expect, and in directions few suspect, a University of Houston economics professor said Monday.

Michael J. Economides, co-author of The Color of Oil, a book about the economics of the industry, presented a paper at the annual meeting of the Society of Petroleum Engineers. R.E. Oligney and A.S. Demarchos were co-authors of the paper.

Economides said environmental concerns, whether "real or imagined," will push development of fuel-cell technology much faster than currently expected. "By 2005, the age of hydrogen will dawn, pushed first by fuel cells running on natural gas or natural gas liquids.

"The not-so-secret multibillion-dollar research and development efforts among car manufacturers�General Motors, Daimler-Chrysler, and Ford�and major oil companies�Exxon, Royal Dutch/Shell, and Texaco�suggest that fuel-cell powered cars are on the immediate horizon," he said.

Economides predicted gas will supply 45-50% of the worldwide energy mix by 2020, with an equivalent reduction in global demand for oil to less than 20% of world energy consumption. By then, he said, oil will be used as a "far more valuable" feedstock for plastic and other synthetics.

He said with only small annual increases in world consumption of oil at that point, there will be enough crude for another 200 years, based on current ultimate recovery estimates. He said there are enough worldwide reserves of gas to sustain it as the primary fuel and the main source for hydrogen power "well into the 22nd century."

Supporters claim Economides correctly predicted the return of $30/bbl oil when it was selling for $11/bbl a couple of years ago.

During the Offshore Technology Conference in Houston last May, when markets were more modest, he predicted natural gas "definitely" would be selling at $4/Mcf or more this winter, with Chicago spot market prices spiking at $40/Mcf in the middle of some not-too-distant winter.

Economides said spot-market gas market price spikes in early 2001 will be "even more severe" than the $20/Mcf paid in the Chicago market in February 1996.

Meanwhile, gas will fuel more than 90% of the proposed power generators to be built in the next decade in the US. The only real constraint on that surge of new power capacity, Economides said, is a 3-year backlog of orders for gas turbines.

But once turbine manufacturers catch up with that demand, he said, the resulting ramp-up in demand for gas will cause "substantial" supply shortages "for a considerable stretch of time," through both winter and summer peaks.

Those new additions to power generation will come at lower unit costs. "But that will still add to the country's cumulative investment in power generation capacity," Economides said.

"We believe that the euphoria of deregulation and intense competition for a share of the emerging market will result in excess capacity in the near-term," the authors said.

That could mean that the cost of electricity would increase rather than decrease. But over-building gas-fired power capacity would permit the shutdown of less efficient high-cost nuclear and coal-fired power plants.

Once the industry clears that "bump" in perhaps 5 years, they said, the price of electricity is likely to fall by some 30%.